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Facts
The assessee offered royalty income via a revised return for AY 2011-12. The Assessing Officer (AO) completed the assessment under section 143(3) after a reference to the Transfer Pricing Officer (TPO) under section 92CA. Crucially, the TPO never passed an order. Subsequently, the Principal Commissioner (PCIT) initiated proceedings under section 263, setting aside the reassessment order.
Held
The Tribunal held that the PCIT erred in invoking section 263 as the premise for revision was based on the non-consideration of a non-existent TPO order. The reassessment order was not erroneous, and no prejudice was caused to the revenue. Therefore, the PCIT's assumption of jurisdiction was invalid.
Key Issues
Whether the Principal Commissioner's assumption of jurisdiction under section 263 was valid when based on the non-consideration of a non-existent Transfer Pricing Officer's order, and whether prejudice to revenue was established.
Sections Cited
263, 143(3), 147, 92CA, 92CA(3), 148
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘J’ BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI MAKARAND VASANT MAHADEOKAR
आदेश / O R D E R PER AMIT SHUKLA (J.M): The present appeal has been filed by the assessee, a public limited company, against the order dated 18 February 2025 passed by the learned Principal Commissioner of Income Tax, Mumbai-6, in exercise of revisional jurisdiction under section 263 of the Income-tax Act, 1961, for the assessment year 2011-12, whereby the reassessment order Red Hat India Pvt. Ltd., passed under section 143(3) read with section 147 of the Act was set aside. The assessee has challenged the assumption of jurisdiction under section 263 as well as the legality and sustainability of the directions issued therein.
The controversy, though projected as one arising from transfer pricing provisions, essentially turns on the correct understanding of the statutory architecture governing sections 92CA and 263, and the legal limits within which revisional powers may be exercised, particularly where the very foundation for revision is predicated on the alleged non- consideration of a Transfer Pricing Officer’s order which, on admitted facts, was never passed.
The material facts are largely undisputed. The assessee is engaged in software-related services and allied activities. For the year under consideration it filed its original return declaring nil taxable income and disclosed an international transaction in the nature of royalty with its associated enterprise, Red Hat Inc. Subsequently, upon finalisation of its books of account, the assessee noticed that royalty income pertaining to assessment year 2011-12 had accrued to it, though owing to a timing mismatch the same had been reflected in the succeeding year. In order to offer such income in the correct year of accrual, the assessee filed a revised return voluntarily offering the royalty income to tax in the year under appeal.
1. Red Hat India Pvt. Ltd., 4. During the original assessment proceedings, the Assessing Officer called for details relating to the revision of return, the reasons for revision, the computations, and the transfer pricing particulars. The assessee furnished the requisite material. The assessment was completed under section 143(3) without any transfer pricing adjustment, and the adjustments, if any, were confined to corporate tax issues.
Thereafter, reassessment proceedings were initiated by issuance of notice under section 148. The assessee objected to reopening, inter alia, on the ground that the royalty income had already been offered to tax through a revised return and examined earlier. The objections were rejected, and the Assessing Officer made a reference to the Transfer Pricing Officer under section 92CA. During the pendency of reassessment, the assessee approached the Hon’ble jurisdictional High Court and obtained interim protection. Subsequently, the writ petition was withdrawn and the stay stood vacated, whereafter proceedings resumed.
It is an admitted and incontrovertible position on record that the Transfer Pricing Officer did not pass any order under section 92CA(3). The reassessment was thereafter completed under section 143(3) read with section 147 without making any transfer pricing adjustment.
The learned Principal Commissioner thereafter initiated proceedings under section 263 on the premise that the Red Hat India Pvt. Ltd., reassessment order is erroneous and prejudicial to the interests of the Revenue, principally because the reassessment order was passed “without considering the order under section 92CA(3)” and without verification of arm’s length price of the royalty transaction. The assessee responded by contending that it had voluntarily offered the royalty income to tax, that all details were furnished, that the Assessing Officer had acted strictly in accordance with law by making a reference to the Transfer Pricing Officer, and that no prejudice had been caused to the Revenue. Notwithstanding such submissions, the learned Principal Commissioner passed the impugned order dated 18 February 2025 holding the reassessment order to be erroneous and prejudicial within the meaning of Explanation 2 to section 263 and set it aside for fresh adjudication.
We have carefully considered the rival submissions and perused the record. It is a settled canon that the revisional power under section 263 is not an unbounded supervisory discretion; it is a jurisdiction conditioned by the statute itself. The legislature has, in clear terms, circumscribed the exercise of such power by insisting upon the coexistence of two jurisdictional facts first, that the order sought to be revised is erroneous, and second, that it is prejudicial to the interests of the Revenue. These conditions are not mere formalities; they are the very gates through which the Commissioner’s Red Hat India Pvt. Ltd., jurisdiction must pass. If either gate remains closed, the revisional jurisdiction cannot lawfully enter.
When we examine the impugned revisional order on this touchstone, what emerges with clarity is that its central plank is the learned Principal Commissioner’s assertion that the reassessment order is erroneous because it was passed “without considering the order of the Transfer Pricing Officer under section 92CA(3)”. This singular premise, however, falters at the threshold for a reason that is not merely technical but foundational: there exists no order under section 92CA(3) on record at all. The Transfer Pricing Officer did not pass any arm’s length determination. The position is not disputed by either side; indeed, it is an admitted fact. Once that is so, the allegation that the Assessing Officer failed to consider such an order becomes self-contradictory and legally untenable. One cannot fault an authority for not considering something that never came into existence.
The fallacy becomes more pronounced when one appreciates the statutory scheme of transfer pricing provisions. Section 92CA is not an incidental provision; it is a carefully designed mechanism that allocates distinct roles. Upon reference by the Assessing Officer, the Transfer Pricing Officer is the statutory authority entrusted with the specialised function of determining the arm’s length price. The Assessing Officer is not a parallel adjudicator of arm’s length issues once such reference is made. Indeed, section Red Hat India Pvt. Ltd., 92CA(4) mandates that the total income shall be computed by the Assessing Officer in conformity with the order of the Transfer Pricing Officer, if any. The phrase “if any” is not decorative. It is a conscious legislative recognition that there can exist situations where an order may not come into being. In such a scenario, the Assessing Officer is not legally empowered to invent, substitute, or simulate the arm’s length determination which the statute assigns to the Transfer Pricing Officer. The law does not authorise the Assessing Officer to step into that specialised jurisdiction in the absence of an order.
Once the statutory demarcation is kept in view, the jurisprudential impossibility of the revisional reasoning becomes evident. The learned Principal Commissioner seeks to treat the reassessment order as erroneous because the Assessing Officer did not “consider” a non-existent order and did not “incorporate” a determination which was never made. This, in effect, punishes the Assessing Officer for not doing what the law did not permit him to do. The Assessing Officer, having made the reference, could not have proceeded to determine the arm’s length price on his own, for that would have amounted to transgressing the statutory allocation of functions. Thus, far from being an “error”, the course adopted by the Assessing Officer reflects adherence to the statutory discipline.
Red Hat India Pvt. Ltd., 12. It is in this context that the invocation of Explanation 2 to section 263 by the learned Principal Commissioner requires close scrutiny. Explanation 2, particularly clause (a), creates a deeming fiction treating an order as erroneous if it is passed without making enquiries or verification which should have been made. However, the crucial phrase is “should have been made” by the Assessing Officer within the framework of his lawful jurisdiction. In a case where the law expressly channels the arm’s length determination to the Transfer Pricing Officer upon reference and restricts the Assessing Officer from undertaking that exercise, it cannot be said that the Assessing Officer “should have” made the very enquiry which the statute forbids him from making. The deeming fiction cannot be stretched to convert statutory restraint into statutory failure. A deeming provision cannot be used to subvert the substantive scheme of the Act itself.
Even if one were to assume, for the sake of argument, that the absence of a transfer pricing order resulted in some deficiency, the correct legal enquiry would then be whether such deficiency can be visited upon the reassessment order by branding it erroneous. The answer, in our considered view, must be in the negative. An “error” under section 263 must be an error in the order of the Assessing Officer, not a perceived inadequacy arising from an act or omission of another statutory authority whose function is independent and specialised. The Assessing Officer cannot be held erroneous Red Hat India Pvt. Ltd., for the Transfer Pricing Officer’s non-passing of an order, particularly when the Assessing Officer has already performed the statutory act of making the reference.
The question then arises: can the learned Principal Commissioner set aside the reassessment order so as to compel a fresh arm’s length determination? Here again, the legal difficulty is insurmountable. The revisional jurisdiction cannot be exercised to create jurisdiction where none exists, nor can it be utilised as an instrument to revive a function that has lapsed by operation of limitation. The statute prescribes timelines for passing an order under section 92CA(3) through section 92CA(3A), which mandates that such order must be passed at least sixty days prior to the expiry of the limitation for completion of assessment or reassessment. If the Transfer Pricing Officer does not pass an order within that statutorily carved time window, the authority to determine the arm’s length price stands exhausted. Such exhaustion is not a curable irregularity; it is statutory finality.
The impugned revisional order, by directing a fresh verification of the arm’s length price, thus seeks to confer a second life upon a process that had already reached its statutory endpoint. Section 263 does not empower the Principal Commissioner to enlarge limitation periods, to resurrect time-barred statutory functions, or to provide a fresh runway for an authority whose time to act has run out. The law does not permit by indirection what it prohibits Red Hat India Pvt. Ltd., directly. If the Transfer Pricing Officer could not lawfully pass an order under section 92CA(3) beyond the prescribed time, the same result cannot be achieved by setting aside the reassessment and remanding the matter for an exercise that the statute no longer authorises.
The above takes us to the second jurisdictional limb of section 263, namely prejudice to the interests of the Revenue. The impugned revisional order proceeds on a broad, generalized apprehension of “potential revenue leakage” without any concrete foundation. The assessee had voluntarily offered the royalty income to tax in the very year under appeal through a revised return. The learned Principal Commissioner has not recorded any prima facie finding that the income so offered was understated, or that a determination of arm’s length price would necessarily yield an upward adjustment. The absence of a transfer pricing order, by itself, does not automatically translate into prejudice. Prejudice cannot be presumed; it must be demonstrated. Section 263 is not a roving commission to conduct exploratory enquiries in the hope of discovering something adverse.
Thus, on both counts error and prejudice the impugned revisional order fails to meet the statutory threshold. The reassessment order cannot be termed erroneous for not considering a non-existent order of the Transfer Pricing Officer, and prejudice to the interests of the Revenue has not Red Hat India Pvt. Ltd., been established on any tangible material. The assumption of jurisdiction under section 263, therefore, rests on a contradiction: it alleges non-consideration of an order which is admitted not to exist, and seeks to set aside the reassessment to facilitate an arm’s length determination which the statute, by limitation and by functional allocation, no longer permits to be made.
In view of the foregoing discussion, we are of the considered opinion that the learned Principal Commissioner could not have assumed jurisdiction under section 263 in the facts and circumstances of the present case. The impugned order dated 18 February 2025 is, therefore, unsustainable in law and is liable to be quashed. Accordingly, the order passed by the learned Principal Commissioner under section 263 is set aside and quashed, and the reassessment order is restored.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 8th January, 2026.